Entry Barrier

Entry Barrier. A barrier to entry is a factor blocking or disincentivizing a new firm from entering a market.

Many entry barriers exist:

⦁ Technological Barriers. A potential entrant may not have the knowledge or access to resources necessary to enter an industry.

⦁ Average Costs (Economies of Scale). A market’s incumbent firms may have large economies of scale and very low AC. Any new firm would not experience economies of scale (because economies of scale occur in the long-run, not as soon as the firm enters the market), so a new firm’s costs may be too high for it to make a profit. So the potential firm is disincentivized from entering the industry.

⦁ Advertising. Advertising creates a brand image, brand loyalty and makes demand for a firm’s good more inelastic. A potential entrant may need to spend a lot on advertising to compete with incumbent firms, and these higher costs disincentives the firm from entering the market.

⦁ Start-Up Costs. An industry may require a high start-up cost for a new firm (a runway for an airline). The higher the start-up cost, the more expensive it is to enter the industry.

⦁ Legal Barriers. After a new good (idea) is invented it can be given a patent, Intellectual Property Right (IPR) or copyright. A patent gives a firm legal protection by the government to be the exclusive producer of a good for a number of years. Only the patent holder can produce the patented good. No new firm can enter the market and produce the same good.

⦁ Quotas and Tariffs. A new firm cannot enter a market if it is blocked by a quota, the firm requires a license to produce. An international tariff may also block foreign firms entering a domestic market.

⦁ Limit Pricing. Limit pricing occurs when an incumbent firm sets a price so low that they earn normal profit (or low super-normal profit) to make rivals make a loss (because they are not as efficient). A potential firm will not enter the industry if they expect to make a loss.

⦁ Predatory Pricing. An incumbent firm may use predatory pricing to price below their own AC curve so that both they and rivals make a loss. Potential firms will not enter the industry if they think they will make a loss. The incumbent firm must be deep-pocketed to do this, they must have the funds to be able to make losses. However, the losses cannot be sustained in the long-run, this tactic is a short-run tactic only. Also, predatory pricing is illegal, so the incumbent firm must avoid being caught by authorities.